The coming debt panic

Monday, December 14, 2009

IT'S TIME to stop worrying about the deficit -- and start panicking about the debt. To put it another way, short-term deficits aren't the real problem. The punishing hangover of borrowed money is. The ballooning national debt once looked like a long-term problem. Now, the long-term has become the middle-term, fast-forwarded by the cratering economy and the unavoidable and immense spending in the service of saving it.

Consider: In the space of a single fiscal year, 2009, the debt soared from 41 percent of the gross domestic product to 53 percent. By way of comparison, the average for the past half-century has been 37 percent. This sum, which does not include what the government has borrowed from its own trust funds, is on track to rise to a crushing 85 percent of the economy by 2018. Getting the debt back down to a reasonable level will require extraordinary, almost unimaginable, fiscal discipline and political cooperation. Failing to do so will lower the national standard of living and ultimately threaten America's economic stability.

The fiscal situation was serious before the recession. It is now dire. An important proposal being released Monday by the Peterson-Pew Commission on Budget Reform urges Congress and the White House to commit immediately to stabilizing the debt at 60 percent of GDP by 2018; come up with a credible plan for getting there; and begin phasing in the necessary policy changes in 2012, once the recovery is fully underway. Warnings about fiscal danger may sound familiar, but one reflection of the current circumstances comes in the composition of the group that signed on to this report and agreed that both tax increases and spending cuts would be required. They range from a liberal former chair of the House Budget Committee, William H. Gray III of Pennsylvania, to a conservative former chair, Jim Nussle of Iowa. The recommendations envision annual benchmarks, enforceable by a debt trigger that would impose spending cuts and a surtax if the specified reductions were not achieved. Once the debt is stabilized in 2018, the goal would be to set it on a glide path to further reduction, closer to the historical average of below 40 percent.

The concept of setting specific goals with automatic and serious consequences for non-performance is intriguing. Gauzy promises to cut the deficit in half in five years are both unconvincing and inadequate; stronger medicine is required, and it will have to be more skillfully designed than previous doses have been. As the report notes, "Past automatic policy changes failed in part because so many programs were exempt from the trigger and it was so easy to bypass the restrictions. A debt trigger should be punitive enough to cause lawmakers to act but realistic enough that it can be enacted as a last resort if policymakers fail to act or select policies fall short of the goal."

Last week Sens. Kent Conrad (D-N.D.) and Judd Gregg (R-N.H.) introduced a new version of their proposal to create a "fiscal task force" to recommend a package of tax and spending changes. Marrying the notion of enforceable debt levels to a commission that could come up with ways to achieve these goals would be an interesting, and potentially productive, union. Both concepts are premised on the notion, sadly correct, that the fiscal picture is too daunting and too politically sensitive to be addressed under the regular order. As the Peterson-Pew report grimly underscores, time is running out to come to grips with that unpleasant fact.

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